As digital technology and internet speeds have improved, there has been an increasing realization that consumers do not — or should not, given the incredibly powerful cable providers — need to subscribe to massive cable bundles with hundreds of channels. Netflix has shown people the amount of programming they could have for under $10 per month, and iTunes and Amazon have allowed people to purchase individual shows while Hulu has provided a combination of both options. HBO Now has lent optimism to the idea that consumers will soon be able to purchase their desired channels a la carte.

For years, MLB.tv has provided both the best and worst aspects of meeting consumer needs, providing an incredible amount of games to fans at a generally acceptable price, but accepting big cash outlays to blackout local games and help keep the current cable bundling model alive. While the St. Louis Cardinals’ new television contract, the latest in a line of local billion-dollar deals, is another example of increasing awareness in Major League Baseball that the current cable model will not last forever. How long it will last is still a matter of great debate.

In many ways, the Cardinals new deal is similar to the deal signed by other teams over the past few years. Despite a market that ranks behind Orlando, Cleveland, and Sacramento, and just ahead of Portland, Charlotte, and Pittsburgh in terms of households, the Cardinals were able to sign a lucrative deal due to incredibly high local ratings and generally high interest in the ballclub. According to Derrick Goold of the St. Louis Post-Dispatch, the deal is set to pay the Cardinals more than a billion dollars over 15 years, an amount that does not include a signing bonus or a 30% stake in FoxSports Midwest, with any revenue received from station ownership not subject MLB’s revenue sharing.

The Cardinals, in the last three seasons of their current deal, are receiving between $25 million and $35 million with the new deal starting close to $55 million in 2018 when the new contract begins. Over the life of the contract, the yearly payout will increase to around $85 million, according to Forbes, who estimated that the new deal increased the value of the Cardinals’ franchise to $1.6 billion, a $200 million increase over their estimate at the start of the season.

The new deal also comes with a recognition of some risk for both parties, and the uncertain landscape of cable television’s future clearly played a role in this deal. At 15 years, this deal is shorter than some of the more recent deals which have generally been for 20 years or more. The parties struck a deal early, as the Cardinals’ current contract with FoxSports Midwest does not expire for another two seasons after this one. In some ways, this was FoxSports Midwest acting like an MLB team approaching their arbitration-eligible slugger and offering a big guarantee to buy out the opportunity to hit free agency. There is the potential for great savings moving forward for the network if the current cable model survives, but on the Cardinals’ side, if the market changes significantly they have already achieved security. Even if the network reaps a windfall, the Cardinals are in a position to benefit with their stake in the network. Cardinals Chairman Bill Dewitt, Jr. acknowledged current uncertainties:

“Everybody wants to hedge their bets. The legacy deals, in general, are below market value. I think a lot of teams are looking at the upside, but it is depending on the market, which is moving. In this deal, we both have the opportunity to benefit in the profitability of the network.”

Two of the bigger deals in recent memory have been major failures up to this point. The Houston Astros deal is already over and the network has filed for bankruptcy with the Astros games now air on RootSports. The Los Angeles Dodgers have been unable to gain entry to much of the LA television market two years into their deal, although the DirecTV/AT&T merger could allow a new set of negotiations to finally get SportsNetLA in all cable-subscribing homes in the area. Despite those difficulties, the Philadelphia Phillies, Arizona Diamondbacks, and now the Cardinals have signed billion-dollar contracts with nearly half of all teams having now signed billion-dollar contracts or own more than 50% of the network airing the games–in some cases both.

Not all teams have it so good. The Atlanta Braves are locked in long-term to a smaller deal, the Cleveland Indians were unable to strike a massive deal when their contract came up, and it is not clear how well a small-market like the Cincinnati Reds will do when their television deal comes up at the end of next season. The next impact deal will happen when the Chicago Cubs’ contracts run out at the end of 2019, with Theo Epstein calling the next contract, “the magic bullet, the paradigm-shifter that’s going to put us in a whole new level.”

With ESPN acknowledging that at some point in the future, but not for at least five years, that they might need to offer their programming a la carte, there is an understanding that the current bundling system will not last forever. While only a portion of cable subscribers are sports fans, cable companies continue to negotiate deals that put networks like ESPN on the standard cable tier with high per-subscriber fees, perhaps worried about erosion from its overall base of customers who might not get cable without sports. MLB has the ability to provide it’s product directly to consumers with MLB.tv, it is aware of a potential shift, and it is open to in-market streaming of games, a potential godsend to those currently blacked out of watching many of the games they wish to see.

“There’s no arrangement now with MLB for in-market streaming and that’s one initiative that Commissioner Manfred is on in a big way,” DeWitt said. “I feel confident that sooner rather than later there will be in-market streaming”

But…

“meaning if you have cable in your house in Cardinals territory and you have a tablet that you can watch that game on that tablet. Right now, you can watch all the other teams but not your team, just to protect the rights.”

MLB is still in the same acknowledgement phase as ESPN, unable to move away from the massive paydays that per-subscriber fees in a bundling system allow. In-market streaming in the above form could potentially help those who subscribe to cable, but do not receive all games through their cable package due to archaic, over-expansive blackout regions like in Iowa that blacks out one-third of the games whether the game is available locally or not.

While a slowing of deals in their present form might be inevitable, sports provide massive amounts of content with necessary commercial breaks that appeals to both consumers and advertisers. At some point, MLB might not be able to reap the benefits of cable providers passing along the costs of massive rights fees to uninterested consumers by way of the cable bundle. When that happens, and MLB potentially cuts out the middle-man cable provider, it will then receive a much greater share of the pie from consumers and advertisers. Those dollars might not keep pace with the current guarantees being paid, but they are not going to vanish. The bubble might get smaller and be more manageable in size, but it does not look like it is going to burst.

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Great stuff, Craig. I think all Rays fans are paying close attention to this with Tampa Bay’s deal set to expire following 2017. Hopefully the bubble will still exist by then. Cardinals did well to hedge that bet.

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3 years ago

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BK

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All four Rays fans are definitely paying attention.

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3 years ago

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Peter R

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The Rays generally do well in the cable ratings. They should be alright. Still need to get their stadium figured out as their game attendance is atrocious.

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3 years ago

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corlflake5000

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